From its breakout to new highs in November, shares of Meta Platforms have climbed as much as 63%. Did that mean Meta stock investors had to cross their arms watching all those gains pass by, waiting for a new breakout?
The short answer is no, and that's because market leaders such as Meta stock will provide "follow-on" buying patterns that act as intermediary entries along a stock's run-up. The main pattern is the three-weeks-tight, and as we explain it, you'll see how it got its name.
Using a weekly stock chart, watch three consecutive weeks of relatively small price ranges from highs to lows. In particular, look for shares to close the week with changes of less than 1.5% apart from the previous week's closing price.
For example, the stock may close one week at 45.50, the next week down 1% to 45.05, then the next week up 0.5% to 45.27. That's a three-weeks-tight pattern.
Such tight price patterns are a signal to investors that the stock is likely to resume its uptrend.
After a stock like Meta climbs from a base, a period of tight price action suggests that institutional investors are not taking profits but instead holding on to what they believe to be a long-term holding. Tight price action — which is also desirable within base patterns — is the opposite of wide and loose action, which indicates market indecision.
Most of the time, the three-weeks-tight pattern shows up as a brief horizontal pause. Some stocks have a habit of making minor price moves week to week. In these cases — they're rarely growth companies — there's no point looking for a three-weeks-tight.
Subscribers to IBD MarketSurge can use the pattern recognition tool, which identifies tight price areas on weekly charts.
Meta Stock And Its Tight Pattern
Last year, Meta Platforms broke out of a base that may best be called a cup with high handle (1), because the handle formed slightly above the cup's highest price. The buy point was 330.54 and the breakout happened the week of Nov. 17.
The week of Dec. 22, Meta stock had climbed 7% from the buy point. Shares started a pause, as the stock was little changed the next week (2), up less than 0.2%. The following week, Meta eased 0.6% (3). That made it a textbook three-weeks-tight pattern, which is shaded in the accompanying image.
Meta stock broke out of the pattern the next week. The buy point is the highest price in the three-week formation, or 361.90 in this example.
The buy range — that is, the highest price to buy shares before it's considered too extended — goes up to 3% from the buy point. For many years, the buy zone went to 5% above the buy point. But a closer look at the pattern this year caused IBD to shrink the buy zone for the three-weeks-tight.
Although the three-weeks-tight is normally viewed as a chance to add shares to an existing position, there's nothing keeping you from making your first purchase of a stock like Meta at a three-weeks-tight. Just keep in mind that by the time a follow-on formation appears, you've forfeited some gains from the initial breakout.
Sometimes, a stock will form a four-weeks-tight pattern. This is a variation on the same formation, only extended one more week. The same principles apply.
